A long-run,short-run,and politico-economic analysis of the welfare costs of inflation |
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| Institution: | 1. Institute for European Global Studies, Political Science Department, University of Basel, Switzerland;2. Amsterdam Institute for Social Science Research, The Netherlands;1. Center for Space Human Robotics @Polito, Istituto Italiano di Tecnologia, Corso Trento 21, 10129 Torino, Italy;2. Applied Science and Technology Department, Politecnico di Torino, Corso Duca degli Abruzzi 24, 10129 Torino, Italy;1. Swarthmore College, Swarthmore, PA 19081, USA;2. Economic Policy Office, Bureau of Economic Growth, Education and Environment, United States Agency for International Development, Washington, DC, USA |
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| Abstract: | The long-run, short-run, and politico-economic welfare implications of inflation are assessed in a Bewley model of money demand. All agents produce and consume every period, and hold money to self-insure against idiosyncratic risk. The model is calibrated so the equilibrium monetary distribution shares features with US data. The long-run welfare costs of inflation are shown to be large because inflation reduces the ability of money to mitigate risk. However, the beneficial redistributive effect of inflation is magnified along the short-run transition and reduces the overall costs. These short-run benefits result in a majority-rule inflation rate above the Friedman Rule. |
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